President Xi Jinping’s pledge to redistribute wealth brings back bad memories for luxury
Many analysts believe the campaign could actually be good for business. While Xi’s plans are still taking shape, his government has made clear that it ultimately wants to raise the incomes of more households and expand the middle class. That, in turn, could help increase purchasing power and consumption.
But experts haven’t ruled out the possibility of the government clamping down on signs of perceived extravagance or raising taxes on the rich, which could darken the outlook for makers of high-end handbags, shoes and jewelry.
“Initially when it was announced, people panicked,” Zuzanna Pusz, a UBS analyst, said of the “common prosperity” pledge. “And the market panicked. Because everyone kind of went back with their memory to the anti-graft campaign, and how the luxury demand back then was impacted.”
Some players have already taken a hit. Shares of LVMH slid 7.9% from August to September, while Kering, the owner of Gucci, fell 19.4% over the same period.
“In the past three months, the [luxury] sector has underperformed the European market … on the back of renewed China concerns,” including the wealth redistribution campaign, a flare-up in coronavirus cases and regulation, Citi analysts wrote in an October report.
The call for ‘common prosperity’
Beijing has been tightening the screws on private enterprise over the past year.
But the ante was upped in August, when Xi told top leaders from the ruling Chinese Communist Party that the government should establish a system to redistribute wealth in the interest of “social fairness.”
According to state news agency Xinhua, Xi said that it was “necessary” to “reasonably regulate excessively high incomes, and encourage high-income people and enterprises to return more to society.” State media has suggested that the government could consider taxation or other ways of redistributing income and wealth.
There have been signs of apprehension within the luxury world. Recently, the sector has lost favor with some investors, which “suggests that short-term China-related uncertainty has been priced in,” UBS analysts wrote in a September report.
“The impact of China’s common prosperity initiatives on luxury consumption … remains investors’ key concern,” they added.
But analysts at the Swiss bank also note that “common prosperity” is not a new concept in China.
Use of the phrase stretches back to the time of Chairman Mao Zedong, who invoked “common prosperity” when advocating for dramatic economic reforms to take power away from rich landlords and farmers, the rural elite.
In 2012, “common prosperity” was “deemed the ‘fundamental principle’ of Chinese socialism” at a major Communist Party gathering, noted Tao Wang, a UBS economist, in a report to clients.
Analysts at the bank also say they expect just “modest and gradual” adjustments in personal income tax and consumption tax in the next few years, suggesting that “the negative impact may be limited and not imminent.”
Some top executives have addressed the issue directly.
Earlier this month, LVMH Chief Financial Officer Jean Jacques Guiony said that he was “not particularly worried or concerned with the recent announcement.”
“We don’t see any reason to believe that this could be detrimental to the upper middle class, affluent class that is the bulk of our customer base,” he told analysts. “Therefore, this seems to us not to be negative — if not positive.”
Last week, Nicolas Hieronimus, CEO of L’Oreal, which owns brands such as Giorgio Armani Beauty and Lancôme, also weighed in.
“We remain very confident for China,” he said on a corporate sales call, adding that the “common prosperity” pledge would likely help make the country’s middle class “wealthier and bigger, [which] is very positive for us.”
A sensitive subject
Industry observers, though, have good reason to worry.
The sector is still facing regulatory concerns, and was recently hit by a sell-off in shares.
Pusz, the UBS analyst, said that may have contributed to some unease.
“Because obviously there has been quite a bit of news flow in the market about several other industries being impacted by various measures of the Chinese government, I think there was a bit of anticipation from people, [like]: ‘Okay, what if luxury comes next?'” she said.
Times have changed
Some analysts, though, think this crackdown could be different.
Bruno Lannes, a partner with Bain’s consumer products and retail practices who is based in Shanghai, said his firm isn’t changing its forecasts because of the “common prosperity” pledge.
“It’s too early to say, but there is no real indication that this has a major impact, I think, on the brands,” he told CNN Business.
Lannes expects the latest policy could have a “neutral” or “positive” effect on luxury consumption, particularly if incomes grow across the country as a result.
“I think it’s very different from what happened [with] the anti-corruption campaign back then,” he added.
Previously, many luxury brands in China were driven by the tradition of executives or officials giving or receiving gifts, which was a huge target of the campaign, Lannes noted. Now, consumption is largely “by people who consume for themselves or for their relatives,” he said.
Some consumers may already be starting to hold back on spending, however.
According to LookLook, a consumer research firm that works with luxury brands, 1 in 10 respondents to a recent survey of 100 luxury buyers in China cited the government crackdown on excessive shows of wealth as a reason they were not spending as much these days.
One participant of the study, which was released in September, cited a desire to not “attract unwanted attention,” according to LookLook CEO Malinda Sanna.
“We’ve never heard that before,” she said. “I think the demand is definitely still there, but they’re being cautious.”
— Laura He contributed to this report.